Ask Annie: Protecting an inheritance - How to keep a home in the family

Q: Like many couples, my wife and I worry about the effects of inheritance tax (IHT) on our estates.

Our house is worth around £1.4m, and we share it with our daughter and her three-year-old child. Our daughter came back to live with us when she split up with her partner and found herself unable to earn enough to support herself and the child in a property of her own.

Our concern is that, when my wife and I are gone, our daughter will, as things stand, have to pay IHT on the value of the house, which would mean she would lose her and her daughter's home. Of course, you might argue, she could sell the house, pay the tax and buy somewhere smaller, but this house has been her home for most of her life.

Can you give us some pointers about how we can leave our family home to our daughter?

AT, Sussex

A: As you rightly say, this is a question that worries many parents. The Chancellor's recent decision to permit the nil-rate band (the amount you can leave without paying tax) to be transferred between married couples means you now have, in effect, an exemption of £600,000 from IHT. But a £1.4m house would still leave £800,000 attracting a potential IHT liability of £320,000.

Tim Cripps, partner in the trusts and estates department at accountants Moore Stephens, says: "The only certain way of totally avoiding an IHT liability is to give the property to your daughter, which would be deemed a potentially exempt transfer, and then for your daughter to grant you a lease with full repairing covenants."

A "potentially exempt transfer" is a gift that becomes exempt from IHT if the donor survives for seven years after making it. If this does not happen, the gift is included in the donor's estate for tax purposes, with tax charged at a rate that depends on how long the donor has survived.

The lease granted to you by your daughter would have to be on terms equivalent to a lease to a third party, and require the house to be kept in good repair – in other words, with no favours to you as the parents of the owner. Otherwise, if you continue to live there, you could be deemed to have given it away while maintaining an interest in it – known as a "reservation of benefit" – and your estate would be liable to IHT.

Mr Cripps says: "You would have to pay your daughter a market rent to avoid reservation of benefit problems."

Another scheme that could reduce IHT is co-ownership. HM Revenue & Customs has made a special exemption from the reservation of benefit rules for jointly owned and jointly occupied property. Where the donor and recipient occupy the property after a proportion has been transferred, the gift is not counted as a gift with reservation of benefit as long as the donor derives no benefit in connection with the proportion of the property gifted.

You could therefore set up a scheme, with parent one owning 25 per cent, parent two another 25 per cent and your daughter 50 per cent. Like the plan involving giving away the house and renting it back, it requires you to live for another seven years to be effective. And if your daughter were to move out of the house during your lifetime, your gift would once more become liable to tax.

A final option would be to use some of your income to buy an insurance policy, which on the second of your deaths would pay out a sum equivalent to the amount estimated to be due in IHT. However, this might prove to be expensive, depending on such factors as your age and state of health.

If you need help from our consumer champion, write to Annie Shaw at The Independent on Sunday, Independent House, 191 Marsh Wall, London E14 9RS or email We cannot return documents, give personal replies or guarantee to answer letters. We accept no legal responsibility for advice given

Independent Partners; request a free guide on NISAs from Hargreaves Lansdown

Life and Style
love + sex A new study has revealed the average size - but does that leave men outside the 'normal' range being thought of as 'abnormal'?
Arts and Entertainment
The Palace of Westminster is falling down, according to John Bercow
voices..says Matthew Norman
Steve Bruce and Gus Poyet clash
Have you tried new the Independent Digital Edition apps?
Graham Norton said Irish broadcaster RTE’s decision to settle was ‘moronic’
Arts and Entertainment
Jake and Dinos Chapman were motivated by revenge to make 'Bring me the Head of Franco Toselli! '
arts + ents Shapero Modern Gallery to show explicit Chapman Brothers film
Arts and Entertainment
Kurt Cobain performing for 'MTV Unplugged' in New York, shortly before his death
music Brett Morgen's 'Cobain: Montage of Heck' debunks many of the myths
Life and Style
Brendan Rodgers
football The Liverpool manager will be the first option after Pep Guardiola
Amazon misled consumers about subscription fees, the ASA has ruled
Arts and Entertainment
Myanna Buring, Julian Rhind-Tutt and Russell Tovey in 'Banished'
TV Jimmy McGovern tackles 18th-century crime and punishment
Arts and Entertainment
Paul Whitehouse as Herbert
arts + ents
Finacial products from our partners
Property search
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating

By clicking 'Search' you
are agreeing to our
Terms of Use.

ES Rentals

    iJobs Job Widget
    iJobs Money & Business

    Recruitment Genius: Sales Executive - OTE £40,000

    £15000 - £18000 per annum: Recruitment Genius: This is a great opportunity for...

    Austen Lloyd: Law Costs HOD - Southampton

    £50000 - £60000 per annum + Excellent Salary: Austen Lloyd: An outstanding new...

    SThree: Recruitment Resourcer

    £20000 - £21000 per annum + uncapped commission: SThree: As a graduate you are...

    Ashdown Group: Junior Application Support Analyst - Fluent German Speaker

    £25000 - £30000 per annum + benefits: Ashdown Group: A global leader operating...

    Day In a Page

    Syrian conflict is the world's first 'climate change war', say scientists, but it won't be the last one

    Climate change key in Syrian conflict

    And it will trigger more war in future
    How I outwitted the Gestapo

    How I outwitted the Gestapo

    My life as a Jew in wartime Berlin
    The nation's favourite animal revealed

    The nation's favourite animal revealed

    Women like cuddly creatures whilst men like creepy-crawlies
    Is this the way to get young people to vote?

    Getting young people to vote

    From #VOTESELFISH to Bite the Ballot
    Poldark star Heida Reed: 'I don't think a single bodice gets ripped'

    Poldark star Heida Reed

    'I don't think a single bodice gets ripped'
    The difference between America and Israel? There isn’t one

    The difference between America and Israel? There isn’t one

    Netanyahu knows he can get away with anything in America, says Robert Fisk
    Families clubbing together to build their own affordable accommodation

    Do It Yourself approach to securing a new house

    Community land trusts marking a new trend for taking the initiative away from developers
    Head of WWF UK: We didn’t send Cameron to the Arctic to see green ideas freeze

    David Nussbaum: We didn’t send Cameron to the Arctic to see green ideas freeze

    The head of WWF UK remains sanguine despite the Government’s failure to live up to its pledges on the environment
    Author Kazuo Ishiguro on being inspired by shoot-outs and samurai

    Author Kazuo Ishiguro on being inspired by shoot-outs and samurai

    Set in a mythologised 5th-century Britain, ‘The Buried Giant’ is a strange beast
    With money, corruption and drugs, this monk fears Buddhism in Thailand is a ‘poisoned fruit’

    Money, corruption and drugs

    The monk who fears Buddhism in Thailand is a ‘poisoned fruit’
    America's first slavery museum established at Django Unchained plantation - 150 years after slavery outlawed

    150 years after it was outlawed...

    ... America's first slavery museum is established in Louisiana
    Kelly Clarkson: How I snubbed Simon Cowell and become a Grammy-winning superstar

    Kelly Clarkson: How I snubbed Simon Cowell and become a Grammy-winning superstar

    The first 'American Idol' winner on how she manages to remain her own woman – Jane Austen fascination and all
    Tony Oursler on exploring our uneasy relationship with technology with his new show

    You won't believe your eyes

    Tony Oursler's new show explores our uneasy relationship with technology. He's one of a growing number of artists with that preoccupation
    Ian Herbert: Peter Moores must go. He should never have been brought back to fail again

    Moores must go. He should never have been brought back to fail again

    The England coach leaves players to find solutions - which makes you wonder where he adds value, says Ian Herbert
    War with Isis: Fears that the looming battle for Mosul will unleash 'a million refugees'

    The battle for Mosul will unleash 'a million refugees'

    Aid agencies prepare for vast exodus following planned Iraqi offensive against the Isis-held city, reports Patrick Cockburn